Solar Loves Thy Neighbors

Some utilities want the public to become angry over solar power. They see a disruption coming and they feel threatened. They are right to see a disruption coming. They are wrong to feel threatened. In the end, most traditional utilities will win.

Until opportunities are understood, some utilities will remain insecure. Some, like their lobbying group Edison Electric Institute (EEI), will attempt to confuse consumers by distorting facts and conflating points of view.

For example, EEI recently rolled out a controversial media campaign where it claimed traditional consumers were paying for their neighbor's solar. In a one-American-against-another strategy, EEI attempted to convince viewers that solar power could cause them financial harm (watch EEI's advertisement here). Its argument appears to be a misrepresentation. Worse, it seems EEI is overlooking profitable opportunities. Those opportunities are available to most of its membership.

As EEI's advertisement argues, solar power is empowering consumers. By installing solar panels in backyards and rooftops, consumers believe they are responsible citizens by becoming self-sufficient and independent. Most believe they will save on their monthly utility bills. In addition, some also think solar may be helping the environment and the regional economy.

Solar power helps neighbors. As more solar power is installed, high-cost generation is displaced. In the open markets, when high-cost producers are displaced, the market price of power is reduced. So, when a local solar facility produces power, the locational marginal price of power will decline. When power prices decline, everyone within the community benefits (not just the panels' owner).

Solar power empowers state governments. By creating incentives to reduce energy consumptions and increasing renewable energy resources, states are able retake their natural capital. With more natural capital (air, land and water), states can expand their economies, create jobs and grow their tax base. They also reduce the state's air, water and land pollution.

Solar power helps states assist neighboring states. Pollution in one state may not affect their constituents. Butit can drift to other states. Pollution drift has become a contentious issue for receiving states. They are fighting to keep other people's pollution out.

The Supreme Court recently heard such a case. In EPA vs. Homer City, the Court was asked to decide how to hold states responsible for drifting pollution. Their decision may affect Homer City's owners, General Electric (GE). Ironically, GE also has a position in First Solar (FSLR) and other renewable energy assets.

Solar installations could improve earnings for Type 2 utilities. As was described here, Type 2 utilities are local distribution companies, state-regulated and connect every retail electric customer in North America. By definition, Type 2 utilities are cost-plus enterprises. Every dollar they invest in infrastructure has a state-guaranteed return.

This is why utilities like Pepco Holdings (POM) are busy trying to convince regulators to lock down a preferred position with renewable assets. If Pepco can monopolize smart meters, dynamic pricing, energy efficiency or other renewable technologies, they can deliver stronger earnings for shareholders.

In fact, many utilities are investing in solar power. It is just not in their own service areas. For example, in their native territory in Virginia, Dominion Resources (D) is taking it slow. But they are delighted to announce their Azalea Solar Facility, a 7,700-kilowatt solar facility located in Southern Company's (SO) service area.

Not to be outdone, Southern is also cautious about solar in the Southeast, but they invested in solar farms in other utilities' service areas in California, Nevada, New Mexico. Duke Energy (DUK) owns 16 solar farms in California, Arizona, Texas, California and North Carolina, but nothing in their South Carolina service area.

Dominion, Southern and Duke are members of EEI. Some of the colleagues are Type 4 utilities or have investments in Type 4 utilities.

It is true that Type 4 utilities could threatened by solar, wind, demand response and other renewable resources. Type 4 utilities depend on high-cost plants to remain in the market. To assure they can capture high prices, it is in their financial interest to have the market dispatch the most costly plants. As such, anything that appears and consistently displaces high-cost plants is a threat.

Separating the various points of view reveals the industry's internal conflicts. One fact is clear: solar power is on the rise. As the solar industry grows, most EEI utilities will prosper. Some utilities will prosper more than others will. A few Type 4 assets will be challenged. But most consumers and their neighbors will become winners.